Big storms rarely dent economy for long

Rebuilding following Sandy likely to be spread out over a few years

WASHINGTON (MarketWatch) — The true cost of Sandy won’t be known for days or even weeks, but major storms seldom have a lasting impact on the U.S. economy.

Reuters

Workers place sandbags at the Path Station as it starts to get flooded in Hoboken while Hurricane Sandy approaches to New Jersey, October 29, 2012.

By and large, most storms are too small to gum up a massive $15 trillion U.S. economic engine. The insurance industry is sometimes stuck with a big bill, and government has to shell out more cash for relief efforts, but the effects of a large storm are usually fleeting.

Even when rebuilding costs are substantial, they tend to be dispersed, noted chief U.S. economist Tom Porcelli of RBC Capital Markets.

“The problem here is that while rebuilding efforts in aggregate can easily become a significant percentage of gross domestic product, the impact is generally spread out over multiple quarters or even years, thereby diminishing the economic impact in the short-term,” he wrote in a note Monday.

A huge exception, of course, was Katrina, the deadly hurricane that flooded New Orleans in 2005 and devastated large portions of the Southeast. That storm alone caused nearly $108 billion in damage, the worst bout of destruction since 1926.

Katrina and other tropical storms in 2005 caused $151.2 billion in damage, adjusted for inflation and other factors to allow comparisons with previous years, according to a 2011 study by the federal government. No other year since the end of World War Two comes close in terms of damage done.

The storm also disrupted oil and gasoline supplies and forced businesses and consumers to briefly pay more for fuel.

The average price of gas jumped from around $2.30 a gallon before Katrina to more than $3 after the hurricane, though the spike was short-lived. Within a few months prices fell below their pre-Katrina lows, according to records kept by the U.S. Energy Information Administration.

The next biggest storm years in the post-World War Two era were 2004 and 1992.

The amount of damage in 2004, mainly the result of four hurricanes to hit the U.S. that year, totaled about $58.6 billion.

The pricetag in 1992, stemming from Hurricane Andrew, totaled about $60.5 billion, according to the National Oceanic and Atmospheric Administration study.

The last time a storm caused as much damage as Katrina was in 1926, when a hurricane devastated Miami and much of the Florida and Alabama panhandle. The hurricane snuffed out a Florida land boom and some economists argue that the U.S. depression started in that region several years before the rest of the nation followed suit.

The storm also became the source of the nickname for a new institution that began operation just one year before: the University of Miami, whose teams are called the Hurricanes.

Sandy would have to shut down New York City for weeks or cause other catastrophic damage to achieve that kind of destruction.

In any case, the cost of the still-developing storm is far from clear and will take time to tally, but Sandy could cause $35 billion to $45 billion in damage if it’s twice as powerful as Hurricane Irene in 2011, estimates Peter Morici, a professor at the Robert H. Smith School of Business at the University of Maryland.

Damage on that scale certainly would boost construction for a year or two — perhaps by as much as $20 billion — as individuals and companies repair or rebuild homes, buildings and other property. That would cause hiring and spending to rise in the construction industry, which is recovering from its worst downturn ever.

Yet money spent to replace existing assets means less cash to spend on other goods and services that probably would have been purchased instead. Rarely is that a net benefit to an economy in the long run — unless the newly built properties include major technological advancements that make them far more valuable or useful.

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